Big Mo' and The Bears

If you watch sports, as many will do this with the Super Bowl on Sunday, you know that games can change direction. Something happens and momentum changes quite suddenly. A team that was piling up scores suddenly becomes tentative and defensive, as was the case with the Arizona Cardinals in the NFC Championship game, even though they held on to win the game. A team that is getting badly beaten inexplicably begins doing good things again.

An alert game announcer notices these changes, and comments on them often in advance of the results having changed significantly. Usually in football, it’s a turnover, such as a fumble or interception, that opens the door for the other team to change the outcome. Sometimes it’s a dumb penalty that incites the other team to action and gets their collective head back in the game.

You can probably guess that I’m really thinking in terms of our dreadful economy. We’re on a team that’s worse than the Arizona Cardinals ever were. We’re up against the Bears, which is unfortunately not just a team from Chicago. The Bears are overpowering and we’re really getting beat. Nobody’s cheering and a turnaround seems impossible. It’s hopeless until we see a sign that things could change. If you’re a fan, you watch for these things and hope they’ll happen. If you’re a player, you’ve got to make them happen or you’re defeated.

An essay by Paulette Miniter in the Christian Science Monitor cautioned people not to panic about their 401ks because stocks will recover before jobs do. She wrote:

Our retirement funds probably aren’t too far away from getting back to work. Stocks are down 40 percent from their last peak, putting us deep in the bear den. But since investors can exectute trades much faster than corporations can start hiring en masse again after a recession, stock prices will likely rise before the economic recovery is official.

I don’t know if Miniter’s right but she’s got a hunch that things might change and she tells us where to look. The essay got me thinking about what signs to look for that momentum might be changing. The stock market index seems inadequate as a scoreboard for the economy; it’s a reflection of how gamblers think about the game in advance rather than what’s actually happening on the field. I wish there was a better way to keep score. However, maybe it’s not the score we should be looking at. It’s the series of actions — in the case of football, it’s a sustained drive — that lead to changing the score.

Tim O’Reilly and I saw Web 2.0 coming because we spotted fundamental changes in the way the game was starting to be played and believed that these were signs that momentum had shifted. The Web was making a comeback, executing with a new playbook, like the West Coast offense of Bill Walsh. The Internet/Web space of late 1990’s shifted from teams with me-too plans easily getting funding to teams in 2002 that were organized around plans that nobody was funding. The remarkable thing was the determination of these startups despite little or no prospects for success. That is, they had few people believing in them, except eventually their fans — people who began using services like Blogger, Flickr and Etsy in greater numbers. It’s like a team that re-discovers why they’re playing the game, and they see that their effort and exertion are causing the cheering in the stands, which only makes them work harder. They stop worrying about losing and focus on playing harder, and on each subsequent play they are playing harder than their opponent. That’s why the score eventually changes.

I don’t know what signs will show that things are turning around but I know we need to be looking. The signs might be incidental or accidental, but they will get you to start wondering if change is coming. They’ll be early-warning signs that the Bears can be moved back a little and maybe scored on. It will get you believing that the Bears can be beaten, and this belief will occur to you as it occurs to others who will begin playing harder, too. Suddenly Big Mo’ changes sides.

When P/E ratios are near their historical average, the economy is probably fine. When P/E ratios are considerably below their historical average, the economy is in a slump, but the market is bound to go back up (because companies are undervalued).

When P/E ratios are above their historical average (as they were in 1928, just before the dot.bomb, or during the middle of this decade), then we’re in a bubble, and you should be very, very scared. We have the bubble behind us now, and we can finally start our recovery — just (please) don’t expect stocks and jobs to go back up to the bubble height, or we’ll have to go through this whole cycle again.

To David I would add that without rapid, deep structural change in the real productive economy we’re hosed in the time frame of a next cycle. So, if stock prices inflate but nothing else changes – and therefore a lot of business-as-usual resumes – we’re dead.

The best possible future is probably the one in which everyone’s 401K remains hurt badly but we change our ways of life (e.g. real production) such that it doesn’t matter as much.

-t

personne

like the concept but the metaphors.. solving these problems is larger than a sports team bearing down on a problem.